Interrelationships among business units of the firm

There are three broad types of possible interrelationships among business units: tangible interrelationships,  intangible interrelationships, and competitor interrelationships. All three types can have important, but different, impacts on competitive advantage and are not mutually exclusive:

Tangible   Interrelationships.   Tangible   interrelationships   arise from opportunities to share activities in the value chain among related business units, due to the presence of common buyers, channels, tech­ nologies, and other factors. Tangible interrelationships lead to competi­ tive advantage if sharing  lowers cost or enhances differentiation enough to exceed the costs of sharing. Business units that  can share a sales force, for example, may be able to lower selling cost or provide the salesperson with a unique package to offer the buyer. Achieving tangi­ ble interrelationships often involves jointly  performing one value activ­ ity while in other cases it involves multiple  activities. When  sister business units cross-sell each other’s  product,  for example, they are sharing both of their sales forces.

Intangible   Interrelationships.   Intangible    interrelationships    in­ volve the transference of management know-how among separate value chains. Businesses that  cannot  share  activities may nevertheless be similar in generic terms, such as in the type of buyer,  type of purchase by the buyer, type of m anufacturing process employed and type of relationship with government.  For  example, beer   and   cigarettes are both frequently purchased recreational products sold qn the basis of image as well as taste, while trucking and waste treatm ent both involve the management of multiple sites.

Intangible interrelationships  lead   to   competitive   advantage through transference of generic skills or know-how about how to man­ age a particular  type of activity from   one business unit  to another. This may lower the cost of the activity or make  it more  unique and outweigh any cost of transferring the know-how. For example, Philip Morris applied product management,  brand  positioning, and advertis­ ing concepts learned in cigarettes to the beer business, substantially changing the nature of competition and dramatically enhancing the competitive position of the Miller brand. It performed marketing activi­ ties for cigarettes and beer separately, but  used expertise gained in managing activities in one industry  to manage  them   more  effectively in another.

Often intangible interrelationships  are manifested   in a firm’s use of the same generic strategy in a number of business units, reflecting management’s skills in executing a particular strategy. For example, Emerson Electric and H. J. Heinz compete by using cost leadership strategies in many of their business units. Emerson  and Heinz have learned how to manage many activities to achieve low cost, and transfer this know-how to similar but separate value activities in many business units.

Competitor   Interrelationships.        The third form of interrelation­ ship, competitor interrelationships,  stems from the existence of rivals that actually or potentially compete  with a firm in more  than  one industry. These multipoint  competitors necessarily link industries to­ gether because actions toward them in one industry  may have implica­ tions in another. While competitor interrelationships occur without tangible or intangible interrelationships  being present  and vice versa, the two often coexist because tangible and intangible interrelationships can provide the basis for diversification. Competitors in one industry, therefore, often expand in the same  directions.

Competitor interrelationships make tangible and intangible inter­ relationships all the more im portant to recognize and exploit. A multi­ point competitor  may   compel a firm   to   match  an   interrelationship or face a competitive disadvantage. M ultipoint  competitors  can also have an overlapping but different set of business units linked by differ­ ent interrelationships than the firm’s, making the matching of such interrelationships difficult.

The three types of interrelationships can occur  together, as has already been suggested. Tangible interrelationships  involving   some value activities can be supplemented  by   intangible   interrelationships in others. Activities shared between two business units can be improved by know-how gained from similar activities in   other  business   units. Both tangible and intangible interrelationships are often present when multipoint competitors are present. Each type of interrelationship, however, leads to competitive advantage in a  different way.

Synergy is not one idea, then, but  three  fundamentally  different ideas. Thus it is no surprise that what is meant by synergy has been vague. Synergy has most  often been described in terms  that  suggest that what was meant  was   intangible   interrelationships— transference of skills or expertise in management from one business unit to another. This form of interrelationship is perhaps the most ephemeral, however, and its role in creating competitive advantage often is uncertain though potentially significant. Hence it is not surprising that many firms have had great difficulty realizing the fruits of synergy in practice.

I will discuss all three forms of interrelationships in this chapter. Tangible and competitive interrelationships have the most compelling link to competitive advantage, and are easier to implement. Intangible interrelationships are fraught with pitfalls and are often difficult to implement, but can still be a powerful source of competitive advantage in some industries. All three types play a role   in   horizontal  strategy, as will be discussed in Chapter 10.6

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

Leave a Reply

Your email address will not be published. Required fields are marked *